You’ve always dreamed of owning your own home. For years you’ve worked to make that dream a reality, putting part of each paycheck aside as you save up for a down payment. You know that to get a favorable mortgage rate you’ll need to have a good credit score, so you’ve been scrupulous about paying your bills on time, never maxing out your credit cards, and sticking to a budget you can afford.
Now, at last, you’re ready to become a homeowner. Thanks to your excellent financial habits, your credit score is a solid 740. You’ve found the house of your dreams and applied for a mortgage loan. You’ve accumulated enough in savings to be able to make an extremely respectable down payment of 20 percent. Based on everything you’ve learned about mortgage borrowing, that should more than qualify you for the most favorable interest rate and fees available. Right?
You’ve done everything you were supposed to do, so this may come as an unwelcome surprise: Because your credit rating is so good and your down payment is so high, the Biden administration has decided to penalize you with a hefty new fee and a higher mortgage rate. As of May 1, mortgage costs for home buyers with risky credit backgrounds will be reduced, resulting in more favorable interest rates. In order to subsidize that discount for less creditworthy borrowers, someone has to pay more. That someone is you and buyers like you — those with credit scores higher than 680 and down payments of 15 percent or more.
The fees involved are called loan-level price adjustments, or LLPAs. These are charges paid upfront; they apply to all mortgages controlled by Fannie Mae and Freddie Mac, the two giant government-chartered finance firms that buy up most home mortgages. LLPA fees are determined by a borrower’s credit score and down payment size, and are commonly converted into percentage points that affect the buyer’s interest rate.
Lending to borrowers with lower credit scores is risky, since by definition they’re less likely to pay back what they borrow. To cover that risk, lenders have to charge them more for mortgages. That makes it harder for low-income borrowers, who are disproportionately Black, to qualify for loans, which exacerbates the racial gap in homeownership. Hence the Biden administration’s plan to “increase pricing support for purchase borrowers limited by income or by wealth,” to quote Sandra Thompson, the director of the Federal Housing Finance Agency. Borrowers with great credit scores will pay higher fees so that those with not-so-great scores can get a discount, thereby enabling more people with poor credit to buy homes.
The only thing wrong with that theory is — everything.
First and foremost, it is egregiously unfair to creditworthy borrowers like you. David Stevens, who headed the Federal Housing Administration under President Barack Obama, has crunched the numbers. He estimates that on a $400,000 loan with a 6 percent mortgage rate, a home buyer in your position, with a credit score of 740 and 20 percent paid down, can expect a $40-a-month hike in your monthly bill. That means a loss of $480 per year, or more than $14,000 over the course of a 30-year mortgage — funds unavailable for home improvement, for a child’s education, or for anything else.
Second, it is not a kindness to qualify borrowers for mortgages they can’t afford. Doesn’t the White House remember the 2008 subprime loan crisis? Lenders went bankrupt, homes were foreclosed on, the housing market collapsed, and the credit of untold thousands of Americans was shredded, largely because of government policies that promoted lending to borrowers who weren’t creditworthy.
Third, boosting the buying power of would-be homeowners with lower incomes won’t change the number of affordable houses available for sale. It will simply boost demand for houses already in short supply. When demand rises and supply doesn’t, the result is higher prices. How will that raise homeownership rates?
Penalizing people who are financially responsible in order to subsidize those who aren’t is terribly unwise. Like other Biden administration policies in recent years — such as the plan to unilaterally forgive student debt, preventing evictions for nonpayment of rent, and prolonging unemployment and health care benefits for people who chose not to work — the new mortgage fees amount to a tax on responsible behavior.
The way to expand homeownership is not to undermine credit scores. It is to get lower-income earners to do what you did — pay their bills faithfully, live within their means, and save for the future. You shouldn’t be punished for having done the right thing, and no one who didn’t should be getting a reward.